Parosteal osteosarcoma is a rare malignant bone tumor arising from the bone cortical surface. It most commonly occurs in young women over the metaphyseal region, especially the long bones near the knee joint. Patients usually report a slow-growing mass for years. The tumor is characterized by its bland microscopic morphology, prone to be misdiagnosed as other benign tumors. In the absence of dedifferentiation, the prognosis is generally better than that of conventional osteosarcoma. Recent studies demonstrated distinctive cytogenetic abnormality resulting in amplification of the CDK4 and MDM2 genes, which may serve as markers for molecular diagnosis. In this article, we review the clinical, radiologic, and pathologic features of parosteal osteosarcoma and identify some diagnostic pitfalls, discuss the prognostic variables, and update recent molecular advances and their application in the diagnosis.